Credit Suisse and UBS shares plunge after takeover announcement

GENEVA — Shares of Credit Suisse plunged 63% in early trading on Monday after news broke that banking giant UBS would buy its struggling rival for nearly $3.25 billion in a deal orchestrated by regulators to avoid further market turbulence in the global banking system.

UBS shares were down 14% in early trading on the Swiss exchange.

Swiss authorities have urged UBS to take over its smaller rival after a Credit Suisse borrowing plan of up to 50 billion francs ($54 billion) failed to reassure investors and bank customers. Shares of Credit Suisse and other banks plunged after the failure of two banks in the United States, raising questions about other potentially fragile global financial institutions.

Credit Suisse is among 30 financial institutions known as global systemically important banks, and authorities are concerned about the fallout if it fails.

The agreement was “of great magnitude for the stability of international finance”, Swiss President Alain Berset said when announcing it on Sunday evening. “An uncontrolled collapse of Credit Suisse would have incalculable consequences for the country and the international financial system.”

The Swiss executive, a seven-member governing body including Berset, passed an emergency ordinance allowing the merger to proceed without shareholder approval.

Markets remain jittery despite regulators’ best efforts to restore calm. Global stock markets fell on Monday, with Hong Kong’s main index slipping more than 3%. The Frankfurt and Paris stock indices opened down more than 1%. Shanghai, Tokyo and Sydney also fell. Wall Street futures were down 1%. Oil prices plunged more than $2 a barrel.

Credit Suisse Chairman Axel Lehmann called the sale to UBS a “turning point”.

“It is a historic, sad and very difficult day for Credit Suisse, for Switzerland and for the global financial markets,” said Lehmann, adding that the focus is now on the future and on the 50,000 employees. Credit Suisse, including 17,000 in Switzerland.

Following the announcement of the Swiss deal, central banks around the world announced coordinated measures to stabilize banks, including access to a loan facility allowing banks to borrow US dollars if they need to. , a practice widely used during the 2008 crisis. Three months after the bankruptcy of Lehman Brothers in September 2008, these swap lines had been exploited for 580 billion dollars. Swap lines were also deployed during market turmoil at the start of the COVID-19 pandemic.

“Today is one of the most important days in European banking since 2008, with profound implications for the sector,” said Max Georgiou, analyst at Third Bridge. “These events could alter the course not only of the European banking sector, but also of the wealth management industry in general.”

Colm Kelleher, the chairman of UBS, hailed the “huge opportunities” of the takeover and pointed to his bank’s “conservative risk culture” – a subtle blow to Credit Suisse’s reputation for more finicky bets at the search for higher returns. He said the combined group would create a wealth manager with more than $5 trillion in total invested assets.

UBS officials have said they plan to sell parts of Credit Suisse or downsize the bank.

Swiss Finance Minister Karin Keller-Sutter said the board “regrets that the bank, which was once a model institution in Switzerland and part of our stronghold, could find itself in this situation.”

The combination of the two largest and best-known Swiss banks, each with historic histories dating back to the mid-19th century, amounts to a thunderbolt for Switzerland’s reputation as a global financial center – putting it on the map. to have a single national banking champion.

The deal follows the collapse of two major US banks last week, which prompted a frantic and broad response from the US government to avert further panic.

European Central Bank President Christine Lagarde hailed the “swift action” of Swiss officials, saying they were “instrumental in restoring orderly market conditions and ensuring financial stability”.

She reiterated that the European banking sector is resilient, with strong financial reserves and plenty of cash available. Banks “are in a completely different position than they were in 2008” during the financial crisis, in part because of tighter government regulation, she said.

The Swiss government is providing more than 100 billion francs to support the takeover.

As part of the deal, about 16 billion francs ($17.3 billion) of Credit Suisse bonds will be wiped out. European banking regulators use a special type of bond designed to provide banks with a capital cushion in times of distress. The bonds are designed to be wiped out if a bank’s capital falls below a certain level, and this was triggered by the government-brokered deal.

This has raised concerns in the market for these bonds and other banks that hold them.

Berset said the Federal Council had been discussing Credit Suisse issues since the beginning of this year and held urgent meetings last week.

Investors and banking industry analysts were still digesting the deal, but at least one analyst suggested the deal could tarnish Switzerland’s global banking image.

“A nationwide reputation for careful financial management, strong regulatory oversight and, frankly, being somewhat austere and boring when it comes to investments, has been erased,” said Octavio Marenzi, CEO of consulting firm Opimas LLC, in an email.

The Financial Stability Board, an international body that monitors the global financial system, named Credit Suisse one of the world’s largest banks, meaning regulators feared a meltdown could hurt the economy. entire financial system like that of Lehman Brothers 15 years ago.

Credit Suisse’s parent bank is not part of European Union supervision, but it does have entities in several European countries that are.

Credit Suisse’s problems resurfaced after it reported managers had identified “significant weaknesses” in its internal controls over financial reporting. This stoked fears that this could be the next domino to fall. Many of its problems are unique and unlike the weaknesses that brought down Silicon Valley Bank and Signature Bank. Their failures led to major bailout efforts by the Federal Deposit Insurance Corp. and the Federal Reserve to avoid a crisis similar to that of 2008.

Shares of Credit Suisse plunged to a record high on Wednesday after its biggest investor, the Saudi National Bank, said it would no longer invest money in the bank to avoid triggering regulations that would come into effect if its stake increased by about 10%.

On Friday, its shares fell 8% to close at 1.86 francs ($2) on the Swiss stock exchange. The stock experienced a long downward slide: it traded at more than 80 francs in 2007.

UBS is bigger but Credit Suisse still wields considerable influence, with $1.4 trillion in assets under management. It has major trading desks around the world, caters to the wealthy through its wealth management business and is a major M&A adviser. The bank weathered the 2008 financial crisis unaided, unlike UBS.

Credit Suisse is seeking to raise funds from investors and deploy a new strategy to overcome a series of problems, including bad hedge fund bets, repeated executive board shake-ups and a spy scandal involving UBS.